64 Financial Institutions
64.1 Meaning
A financial institution (FI) is an organisation that provides financial services — deposit taking, lending, investment, insurance, payments, advisory (khan2022?; rbi2024?). FIs intermediate between savers and investors, transforming the maturity, risk, denomination and liquidity of financial claims.
64.2 Classification of Financial Institutions
| Family | Working content | Examples |
|---|---|---|
| Banking institutions | Accept demand deposits, issue cheques, create credit | Commercial banks, Cooperative banks, RRBs, SFBs, Payments Banks |
| Non-banking institutions | Cannot accept demand deposits or issue cheques | NBFCs, Insurance companies, Mutual funds, Pension funds, DFIs, Housing finance companies |
64.3 Non-Banking Financial Companies (NBFCs)
A Non-Banking Financial Company is a company registered under the Companies Act and engaged in the business of loans, advances, acquisition of shares, securities, insurance, leasing, hire purchase or chit fund, but cannot accept demand deposits or issue cheques (rbi2024?).
| Dimension | Bank | NBFC |
|---|---|---|
| Demand deposits | Yes | No |
| Cheques / payment instruments | Yes | No |
| Lending | Yes | Yes |
| Reserve requirements (CRR / SLR) | Mandatory | Not applicable |
| Deposit insurance | Yes (DICGC) | No |
| Regulator | RBI | RBI (significant NBFCs) |
| Foreign investment | Subject to caps | Largely allowed under automatic route |
64.3.1 Categories of NBFCs
| Category | Working content |
|---|---|
| Asset Finance Company (AFC) | Finances physical assets — vehicles, machinery |
| Loan Company (LC) | Provides loans for any purpose other than its own |
| Investment Company (IC) | Acquires securities |
| Infrastructure Finance Company (IFC) | Min 75 % assets in infrastructure loans |
| Infrastructure Debt Fund (IDF) | Long-term infrastructure debt |
| Microfinance Institution (NBFC-MFI) | Min 75 % assets in micro-loans |
| Factor (NBFC-Factor) | Receivables financing |
| NBFC — P2P | Peer-to-peer lending platform |
| NBFC — Account Aggregator | Consent-based data sharing |
| Housing Finance Company (HFC) | Housing loans (regulated by RBI since 2019) |
| Core Investment Company (CIC) | Holds investments in group companies |
64.3.2 Scale-Based Regulation of NBFCs (2022)
The RBI moved to a scale-based regulatory architecture from October 2022:
| Layer | Coverage | Examples |
|---|---|---|
| Base Layer (NBFC-BL) | Smaller NBFCs (< ₹1,000 cr assets) | Most small NBFCs |
| Middle Layer (NBFC-ML) | Larger NBFCs (≥ ₹1,000 cr) | Bajaj Finance, Mahindra Finance |
| Upper Layer (NBFC-UL) | Top 10 (or specific) systemically important NBFCs | Identified by RBI |
| Top Layer (NBFC-TL) | Reserved for very large NBFCs that pose extreme risk | Empty unless triggered |
64.4 Insurance Companies
The Indian insurance sector was opened to private participation in 2000 (after the IRDA Act 1999). It is regulated by the Insurance Regulatory and Development Authority of India (IRDAI).
| Segment | Notable players |
|---|---|
| Life insurance | LIC (1956 nationalised), HDFC Life, ICICI Pru Life, SBI Life, Max Life, Bajaj Allianz Life |
| General insurance | New India Assurance, Oriental, United India, National Insurance (4 PSU); ICICI Lombard, Bajaj Allianz, HDFC Ergo (private) |
| Reinsurance | GIC Re (PSU); foreign branches |
| Health insurance | Star Health, Care Health, ManipalCigna, Niva Bupa, Aditya Birla Health |
The FDI cap in Indian insurance was raised to 74 per cent (Finance Act 2021).
64.5 Mutual Funds
A mutual fund is a trust that pools money from investors and invests it in securities — equity, debt, hybrid, or money-market instruments. Regulated by SEBI (Mutual Funds) Regulations, 1996.
| Body | Role |
|---|---|
| Sponsor | Promoter — typically a financial institution or company |
| Trustees | Hold assets in trust for unit-holders |
| Asset Management Company (AMC) | Manages the fund |
| Custodian | Holds securities |
| Registrar and Transfer Agent (R&TA) | Maintains investor records |
| Type | Working content |
|---|---|
| Equity funds | Invest mainly in equity |
| Debt funds | Invest in fixed-income |
| Hybrid funds | Mix of equity and debt |
| Index funds and ETFs | Track an index passively |
| Liquid funds | Money-market instruments |
| ELSS (Equity Linked Savings Scheme) | Tax-saving under Sec. 80C |
| Fund of Funds (FoF) | Invests in other funds |
| Solution-oriented | Retirement, child education |
| International funds | Invest in foreign securities |
The Association of Mutual Funds in India (AMFI) — set up 1995 — is the industry body.
64.6 Pension Funds and EPFO
| Body | Coverage |
|---|---|
| EPFO — Employees’ Provident Fund Organisation | Employees in establishments employing 20+ persons under EPF & MP Act 1952 |
| NPS — National Pension System | All citizens; mandatory for central-government employees joining since 2004 |
| APY — Atal Pension Yojana | Unorganised-sector workers |
| Old Pension Scheme | Pre-2004 government employees (defined benefit) |
The Pension Fund Regulatory and Development Authority (PFRDA) — statutory since 2013 — regulates NPS and APY.
64.7 Development Financial Institutions (DFIs)
| DFI | Year | Mandate |
|---|---|---|
| IFCI | 1948 | First Indian DFI; industrial finance |
| ICICI | 1955 | Industrial credit; converted to bank 2002 |
| IDBI | 1964 | Industrial development; converted to bank 2004 |
| NABARD | 1982 | Agriculture and rural development |
| EXIM Bank | 1982 | Foreign-trade finance |
| NHB | 1988 | Housing finance |
| SIDBI | 1990 | MSME finance |
| NaBFID | 2021 | Long-term infrastructure |
64.8 Other Financial Institutions
| Institution | Role |
|---|---|
| DICGC — Deposit Insurance and Credit Guarantee Corporation | Insures bank deposits up to ₹5 lakh |
| CRAs — Credit Rating Agencies | CRISIL, ICRA, CARE, India Ratings, Brickwork |
| Stock Holding Corporation of India (SHCIL) | Custodial services |
| NSDL, CDSL | Depositories — dematerialisation of securities |
| SBI DFHI | Discount and Finance House of India |
| CCIL — Clearing Corporation of India | Clearing and settlement of G-Sec, forex, money-market trades |
64.9 Exam-Pattern MCQs
Q1. Which of the following is not a category of NBFC under RBI’s classification?
A. Asset Finance Company B. Investment Company C. Microfinance Institution D. Universal Bank
Answer: D. Universal Bank is a bank, not an NBFC.
Q2. Match each DFI with its mandate:
| DFI | Mandate | ||
|---|---|---|---|
| (i) | NABARD | (a) | Foreign trade |
| (ii) | SIDBI | (b) | Long-term infrastructure |
| (iii) | EXIM Bank | (c) | Agriculture and rural development |
| (iv) | NaBFID | (d) | MSME finance |
A. (i)-(c), (ii)-(d), (iii)-(a), (iv)-(b) B. (i)-(a), (ii)-(b), (iii)-(c), (iv)-(d) C. (i)-(b), (ii)-(c), (iii)-(d), (iv)-(a) D. (i)-(d), (ii)-(a), (iii)-(b), (iv)-(c)
Answer: A.
Q3. The FDI cap in the Indian insurance sector is currently:
A. 26 % B. 49 % C. 74 % D. 100 %
Answer: C. The cap was raised to 74 % by the Finance Act 2021.
Q4. Match each layer of RBI’s scale-based NBFC regulation with its content:
| Layer | Content | ||
|---|---|---|---|
| (i) | Base Layer | (a) | NBFCs ≥ ₹1,000 cr assets |
| (ii) | Middle Layer | (b) | Smaller NBFCs |
| (iii) | Upper Layer | (c) | Reserved for very large NBFCs |
| (iv) | Top Layer | (d) | Top 10 / specific systemically important NBFCs |
A. (i)-(b), (ii)-(a), (iii)-(d), (iv)-(c) B. (i)-(a), (ii)-(b), (iii)-(c), (iv)-(d) C. (i)-(c), (ii)-(d), (iii)-(b), (iv)-(a) D. (i)-(d), (ii)-(c), (iii)-(a), (iv)-(b)
Answer: A.
Q5. Match each Indian financial institution with its role:
| Institution | Role | ||
|---|---|---|---|
| (i) | NSDL / CDSL | (a) | Insures bank deposits up to ₹5 lakh |
| (ii) | DICGC | (b) | Depositories — dematerialisation |
| (iii) | CCIL | (c) | Clearing of G-Sec, forex, money-market trades |
| (iv) | AMFI | (d) | Mutual-fund industry body |
A. (i)-(b), (ii)-(a), (iii)-(c), (iv)-(d) B. (i)-(a), (ii)-(b), (iii)-(c), (iv)-(d) C. (i)-(c), (ii)-(d), (iii)-(b), (iv)-(a) D. (i)-(d), (ii)-(c), (iii)-(a), (iv)-(b)
Answer: A.
Q6. Which of the following is not a structural body of a mutual fund?
A. Sponsor B. Trustees C. Asset Management Company D. Stock Exchange
Answer: D. Stock exchanges trade securities; they are not part of the mutual-fund structure.
Q7. ELSS (Equity Linked Savings Scheme) qualifies for tax deduction under:
A. Section 24 B. Section 80C C. Section 80D D. Section 10(10D)
Answer: B. ELSS investments qualify for deduction under Section 80C of the Income-Tax Act.
Q8. Arrange the following Indian DFIs in chronological order of establishment:
- NABARD
- IFCI
- NaBFID
- SIDBI
A. (ii), (i), (iv), (iii) B. (i), (ii), (iii), (iv) C. (iii), (iv), (ii), (i) D. (iv), (iii), (ii), (i)
Answer: A. IFCI 1948 → NABARD 1982 → SIDBI 1990 → NaBFID 2021.
- Financial institutions — banking (deposits + cheques + credit creation) vs non-banking.
- NBFCs: cannot accept demand deposits or issue cheques; no DICGC; regulated by RBI.
- NBFC categories: AFC, LC, IC, IFC, IDF, NBFC-MFI, Factor, P2P, AA, HFC, CIC.
- Scale-based regulation (Oct 2022): Base, Middle, Upper, Top layers.
- Insurance: regulated by IRDAI (1999); FDI cap 74 % (since 2021); LIC nationalised 1956.
- Mutual funds — SEBI Reg 1996; structure: Sponsor → Trustees → AMC → Custodian → R&TA. AMFI is industry body.
- Pension: EPFO (under EPF & MP Act 1952), NPS (since 2004), APY, OPS (pre-2004); regulator PFRDA.
- DFIs: IFCI 1948, ICICI 1955 (now bank), IDBI 1964 (now bank), NABARD 1982, EXIM 1982, NHB 1988, SIDBI 1990, NaBFID 2021.
- Allied bodies: DICGC, CRAs (CRISIL/ICRA/CARE), SHCIL, NSDL/CDSL, CCIL.